Economic Policy Analysis: A Critical Review of Selected Readings (2012-2016)

The provided content consists of various articles, books, and online resources that discuss economic theories, policies, and issues related to public policy. The topics covered include labor economics, income inequality, water resource management, government subsidies, welfare economics, global health, and environmental economics. Additionally, there are references to the Washington Consensus, a set of policy prescriptions for development, and criticisms surrounding its implementation by international organizations such as the World Bank and IMF.

ECONOMICS FOR PUBLIC POLICY
ANALYSIS
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The Washington Consensus is a set of 10 economic policy prescriptions that is
considered to constitute the standard of reform package which is promoted for crisis wracked
developing countries by Washington D.C (Munda, 2016). The prescriptions encompasses
policies in such areas as macroeconomic stabilization, economic opening with respect to both
trade and investment. It also focuses on the expansion of market forces within the domestic
economy. Washington Consensus refers to set of broadly free market economic ideas which are
supported by international organizations such as IMF, the World Bank and the US. It has been
observed that the Washington Consensus advocates free trade, floating exchange rates, free
markets and macroeconomic stability. During the past few years, the American economy has
demonstrated impressive resiliency which has improved (The Paradox of Neoliberalism: A
Critique of the Washington Consensus in the Age of Globalization. 2006) America’s economic
performance substantially. This has also reduced the percentage of inflation from 13 to 4%.
However, the rise in unemployment was an inevitable consequence of the accelerating
inflation of the later 1970s which has retreated just a fraction of seven percent. The GNP has
amended more than 12% in the two years since the recovery began (What are the main concerns
and criticism about the World Bank and IMF. 2005). Thus, it has also been witnessed that much
of the progress has been mirrored in other industrial countries. Inflation level has been reduced
throughout Western Europe; hence this has raised the real GNP level. But, even after that
unemployment rates remain extremely high in this domain. The experience the past few years
has underlined the interdependence of the world economy (Ahonen, 2016). Changes have also
been observed in international trade, capital flows and in exchange rates and that further affected
all the major economies. The rise in real interest rates depicts that there is a close link among
capital markets. In this regard, U.S budget deficit has been the dominant influence on the world
economy during the past two years. This also denotes that the coming resolution of America’s
fiscal imbalance will have profound effects during the years ahead (Dolan and Fujiwara, 2016).
The United States is witnessing economic disaster from several grounds and most of the
people are unaware about the signs of emerging crisis. America’s economic policy makers have
some of the hardest and most important jobs in the world because they have to take actions to
boost the economy to the most powerful economy in the world (Taylor-Gooby, 2016). Economic
capacity of America is the powerful engine of economic growth across the globe that assists in
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reducing issues and constraints. Maintaining a health U.S economy is a prerequisite aspect that
improves the living standard and quality of life, not only of Americans, but also other individuals
the world over. There are several challenges arise at the time of maintaining a healthy economy
and this may also impede the economy in many ways (What happened to the Washington
Consensus? The evolution of international development policy. 2008.). Globalization is one such
aspect that brings both opportunity and change; hence policy makers have to combat unfair trade
practices from other countries for the purpose of ensuring that the global economy continues to
run smoothly.
Consensus does not argue for high inflation as it is less focused on socialism; hence it
does not make any promising aspect for strategic intervention. This may be another aspect for
closing economy and all the democratic governments were destabilised by crisis (What
Washington Means by Policy Reform. 2002). The stability of the government has been changing
because of international financial crisis and this has also spread in Latin America. Further,
instability in the economy can also spread to the political situation through the weaknesses of
government. Political instability can also impact economic conditions through markets. This, it
can be said that the circular patterns of increasing instability has four major phases.
Washington believes in fiscal discipline; hence for such purpose the government has
restored a balanced budget (Teutsch, Glied and Roy, 2016). In this respect, The International
Monetary Fund has made the restoration of fiscal discipline which is a central element of the
high conditionality program. It also negotiates with its members to borrow financial funds (Did
the Washington Consensus Fail. 2002). The budget deficit has traditionally been measured in
nominal terms due to the increase of government expenditure over the actual receipts. In the year
1982, Brail argued with the IMF that this way of measuring the deficit is misleading in a high-
inflation country because most of the nominal interest payments on government debts are
accelerated amortisation of principal. Further, IMF has accepted with some reluctance; thus
looking towards this concern, changes has been made to operational deficit. This includes only
those expenditure which is the actual component of interest paid on government debt (Fleurbaey,
2016). Washington Consensus was imperative to determine policy towards economic
development in Latin America, South East Asia and other countries.
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The major implication of Washington Consensus can be seen in the area of IMF bailouts
that tends to involve in free market reforms as a condition of receiving money. This may change
the developing economies; hence they might have to stick to their primary products and services
correspondingly (The Washington Consensus as Policy Prescription for Development. 2004).
This has been majorly criticized through strategic trade theory in which some economists argue
that free trade is not always in the best interest of developing economies and a stern adoption of
free trade and comparative advantage can leave developing economies producing low income
growth and volatile priced products and services. Further, implementing fiscal rules can also lead
to unwanted economic hardship especially during the period when government diminishes the
spending in inappropriate expenditure (Tietenberg and Lewis, 2016). For instance- fiscal
consolidation during recession has led to low growth rates and it has also caused failure to reduce
debt to GDP ratios. Hence, in this regard, it has been identified that if government is pressurized
to cut down the spending; then it can help in supporting welfare programs.
But at the same time, American budget deficit has raised real interest rates in the world
capital marker; thus it has also persuaded European ruling bodies to develop different monetary
and fiscal policies (Ling, Osman, Muhammad, Yeng and Jin, 2016). That further needs to be
focused on offsetting the inflationary pressure that is being caused by the reduced value of the
currency. It can also be said that the poor performance of European investment and employment
has increases due to small part of investment in budget deficits in the United States (Washington
consensus – definition and criticism. 2013). Henceforth, drastic action is needed to restore the
economic and financial interdependence and the economy must begin to rebuild different
industries to strengthen employment capabilities. It is also vital for the government to ensure that
it is once profitable to produce most goods and services in American factories. This is an
underlying process which can bring employment opportunities for American workers. Thus,
looking towards this concern government of United States must establish policies that can
prevent other countries to enhance trade relations with American industries (Ehrenberg and
Smith, 2016). Hence, all such reforms could persuade the economic prosperity of the nation.
Contingent expenditure such as the guarantee given to savings and loan institutions in the
United Stated are sometimes involved in reported budget outlays. Thus, it has also been observed
that interest subsidies and some other expenditure are provided by central bank rather than from
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the budget. The government has also developed privatization proceeds wherein revenue is
recorded rather than a means of financing a fiscal deficit (Campbell and Gillespie, 2016). Central
bodies have also amended future liabilities of the social security system which is excluded in
budgetary outlays. Hence, it is clear that there are several differences in the interpretation of
fiscal discipline; however still there is a broad agreement in Washington that helps in sustaining
fiscal deficits which is a primary source of macroeconomic dislocation. This works in the form
of inflation, payment deficits and capital investment (Griffin, 2016). Regarding this, it is
essential to promote open markers and economic growth for the purpose of rebalancing trade
accounts and domestic industrial collapse of America.
The subsequent industries have been so disarmed and dismantled that it not lacks the
knowledge, capacity and investment capital to facilitate self- sustaining production. Therefore,
considering these aspects, it is evident that new direction is required to be provided (What
Washington Means by Policy Reform. 2002). As per the generalized term, Washington
Consensus reflects several trade and development policies. Thus, it includes certain regulations
like fiscal discipline, tax reform and trade liberalization that directs the business entities to
manage inflow and outflow of direct investment. A direction of public expenditure priorities
toward fields offers both high economic returns and the potential to improve income distribution
in several areas such as primary health care, primary education and infrastructure (Scheffler,
2016). This also secure property rights of several industries and as a result, it aids in achieving
competitive exchange rate. However, on the other hand, it has lightened dissatisfaction among
anti-globalisation protestors who desires to work on developing country.
Criticism of the World Bank and the IMF encompasses a whole range of issues; however
they generally depict concern towards the approaches that are adopted in the area of policy
formulation. This has also changed the ways of governing monetary and country policies and
strategies (Gillespie, 2016). This includes social and economic impact of these policies that have
on the population of countries who avail themselves of financial assistance from any of the major
institutions. Several criticisms have been generated in this area and that are concerned with
conditionalities that is imposed on borrower countries. These conditionalities are attached
without due to regard for the borrower countries (including individual circumstances and the
prescriptive recommendations) by the World Bank and IMF that fail to resolve the economic
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problems that prevails within the countries (Teutsch, Glied and Roy, 2016). However, on the
other hand, it may also result in the loss of a state’s authority to govern its own economy as
national economic policies are predetermined under IMF packages.
Several issues of representation are also raised as a consequence of the shift in the
regulation of national economies from state government to a Washington based financial
institution in which most of the developing countries hold little voting power (The Top 10
Solutions to Cut Poverty and Grow the Middle Class. 2014). Regarding this, changes have also
been observed in IMF packages which is associated with negative social outcomes such as
reduced investment in public health and education. There are ten major reforms which have been
introduced by Washington Consensus; however that is difficult to deny because it is based on
different terminologies. Fiscal discipline was developed in the context where all the countries
have large deficits that led to balance of payments crisis and high inflation. This may hit mainly
the poor class people become the rich could park their money abroad. Recording public
expenditure priorities suggested that switching expenditure in a pro-poor way can discriminate
subsidies to basic health and education (Fleurbaey, 2016). Further, this can also develop tax
reform which constructs a tax system that combines a broad tax base with moderate marginal tax
rates.
Competitive exchange rate ensure that exchange rate would be competitive which implies
an intermediate regime. This clearly denotes that Washington was already beginning to subscribe
to the two corner doctrine. Trade liberalization shows the difference of view about how fast trade
should be liberalized (Tietenberg and Lewis, 2016). At the same time, this has also enacted
liberalization of inward foreign direct investment which is a comprehensive account
liberalization that did not command a consensus in Washington. Privatization was one of another
area which is originated as a neoliberal idea that had won broad acceptance. This has made all
the matters an issue in which privatization is done and it can be a highly corrupt process that
transfers assets to a privileged elite for a fraction of their true value. This also generates evidence
that brings benefits to the economy when it is done properly (Ehrenberg and Smith, 2016).
Deregulation has focused specifically on easing barriers to entry and exit and it does not
abolishes regulations designed for safety or environmental reasons.
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The interest of property rights have changed and this was primarily about providing the
informal sector with the ability to gain property rights at acceptable cost. There are basically
three ideas such as macroeconomic discipline, a market economy and openness to the world
(How To Fix The Economy In One Simple Chart. 2012). These are the ideas that are long been
considered; however they can be used as a tool of global apartheid which claims that developing
countries came from a different universe which enables in deriving several benefits such as
inflation (that reaps the inflation tax and boost investment) and leading role for the state in
initiating industrialization and last is import substitution (Campbell and Gillespie, 2016). The
Washington Consensus said that this era will be over will soon because of the involvement of
different reforms. The government should immediately curb out and control spending on
unnecessary programs and initiatives that are being financed by foreign debt. Along with this, the
first world nations have established industrial superiority over the economy and this can also
implement best economic policies.
Further, the government should not allow individuals and companies to profit by selling
out the United States. Currently, no plans have been developed to revive the economic and
industrial self-sufficiency (Gillespie, 2016). Because of the industrial decline has already gone so
far; thus it has been proceeding rapidly more than 30 years which restores the industry to world-
leading standards of competitiveness. This will require serious restrictions on trade and
investment flows. Despite indisputable evidence that current policies have proved grossly
inadequate or even counterproductive in the past years (Did the Washington Consensus Fail.
2002). This has also shown that government is committed to a business strategy that is doomed
to failure. The stimulation for new policies must come directly from the broad American public
wherein voters must use all the reasonable methods to pressure the elected officials. Without
direct and immediate action, government would not be able to enhance the competitiveness of
the economic facets. The reforms should also be used in the form of protection from foreign
countries and corporations that seeks to gain control of key industrial processes and technologies
(The Washington Consensus as Policy Prescription for Development. 2004).
This would also include preventing the sale of strategic US domestic companies to
foreign companies and at the same time, it also eliminates offshore outsourcing which is
acceptable in extreme circumstances (Economic Solutions. 2016). The trade treaties should also
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be protected from country to predatory foreign countries and companies at this stage can also
seek to weaken or destroy American industry. The level of income has been changed and
inequality is spreading more with high levels; thus it could increase economic insecurity and
economic problems which can generate other issues (Ahonen, 2016). They are the direct result of
policy choices that put wealth and income into the hands which further increase the expense of
growing middle class. One of the nation’s most effective anti-poverty tools (earned income tax
credit) has helped more than 6.5 million Americans to avoid poverty. This is also regarded as an
investment that pays long term dividends; hence this should be strengthened on higher extent.
Most of the criticism has been focused on trade liberalization and the elimination of
subsidies and this has been particularly strident in the agriculture sector. For example- in the year
2010, several Latin American countries were led by socialists or other were governmental bodies
which have policies contradicted to Washington Consensus policies (Dolan and Fujiwara, 2016).
The other area of public expenditure that Washington regards as productive is public
infrastructure investment. There is a view that spending on infrastructure should be proper within
the public sector so that it can specify average industry products that are not starved of huge
investment. Policy reform concerned with public expenditure is also perceived as switching
expenditure from subsidies towards education and health and infrastructure investment
(Tietenberg and Lewis, 2016). Increased tax revenues are the alternative to decreased public
expenditures as a remedy for a fiscal deficit. Thus, most of the political Washington regards
them as inferior alternative. The principle is based that the tax base should be developed in
broader sense so that marginal rates should be moderate. This principle was based on the reforms
made by US income tax which was promoted with equal enthusiasm by the ruling bodies
(Ehrenberg and Smith, 2016).
Two general interest rates have also been increased regarding the considerable support in
Washington. It worked for the objective in which resource allocation process is required to be
strengthen through several bureaucrats that develops rationing credit ratio as per arbitrary criteria
(Campbell and Gillespie, 2016). The other principle that is related in the same area is real interest
rate which needs to be positive; hence at the same time it discourages capital investment and
degree of savings. The second element of an outward oriented economic policy is import
liberalization which has clear provisions for access to imports of intermediate inputs at
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competitive prices. This is an ideal situation in which domestic resource cost of generating
foreign exchange can be equalized (American Economic Policy and the World Economy. 2016).
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